Where’s the Beef? A Few Words About Paying for Performance in Bankruptcy
In response to Paying for Performance in Bankruptcy: Why CEOs Should Be Compensated With Debt by Yair Listokin
Few business law subjects get jaws flapping like executive compensation. When we see Michael Ovitz and Robert Nardelli receive millions of dollars—for doing a bad job—we have to wonder whether our system’s incentives might be askew. Indeed, some of our best recent business law scholarship wrestles with the difficult questions posed by executive compensation, which, to paraphrase Bebchuk and Fried, reduce to this: How do we link pay to performance?
Yair Listokin has invited us to map this discussion onto the question of executive compensation in Chapter 11 reorganization. It is a welcome invitation, because there is doubtless value in thinking carefully and creatively about improving incentives for those in control of a debtor in possession (DIP) in reorganization under Chapter 11. Large corporate debtors are, like all large (and small) corporations, ultimately run by human beings. Being fallible, greedy, and complex, one easily could imagine that the people who manage Chapter 11 debtors might engage in the same sort of agency arbitrage that we see between the managers of large publicly held corporations and those corporations’ widely dispersed shareholders. Although management agency costs are well studied outside of bankruptcy, they have gone largely unnoticed in bankruptcy scholarship in recent years. That Listokin wishes to “reorient the scholarly debate in bankruptcy toward the problem of executive compensation” is good news.
In simple terms, Listokin believes that properly constructed incentive compensation packages would promote effective management and constrain agency problems in Chapter 11 reorganizations by empowering creditors’ committees to pay management with corporate debt. This would align the interests of management with those of the “true” residual claimants of the reorganizing debtor—the unsecured creditors. Listokin would thus give to the creditors’ committee the right effectively to assign to management a portion (a “vertical strip”) of the corporation’s debt as part of management’s compensation.
There is much about Listokin’s article that is valuable. He provides a rigorous economic analysis of some of the unexpected implications of incentive compensation in reorganization. He shines considerable light on a rather dim corner of bankruptcy and corporate governance. Perhaps more importantly, he sets the stage for further inquiry. But I also have doubts and concerns. I am persuaded neither that there is much of a problem, nor by the solution he proposes.
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